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ECB calls general idea behind MMT a ‘dangerous proposition’

Carolynn Look, Bloomberg News

The stars of the European Union (EU) sit on banners flying outside the European Central Bank (ECB) headquarters ahead of the central bank's interest rate decision news conference in Frankfurt, Germany, on Thursday, Sept. 13, 2018. The ECB confirmed it will cut bond-buying in half next month and anticipates that new purchases will be halted by the end of the year.
, Bloomberg

Bloomberg -- Hardly any Twitter debate on economics these days can avoid touching on Modern Monetary Theory -- even on central banks’ official channels.

In an hour-long question-and-answer session on Tuesday, European Central Bank chief economist Peter Praet tweeted his disapproval of one of the theory’s key tenets after being asked his views.

MMT’s headline argument is that countries issuing bonds in their own currencies don’t need to be so worried about overspending because they can always print money to pay off their debt. Advocates often see it as a framework of tools rather than a specific policy package, and point to years of low inflation in major advanced economies as evidence that they might be able to handle more spending than is generally assumed.

The euro area doesn’t fit neatly into the theory because there’s only one central bank conducting monetary policy for 19 fiscally sovereign countries.

Wall Street titans and prominent economists have joined the debate about the idea’s shortcomings and merits. Jerome Powell, the chairman of the U.S. Federal Reserve, recently called the concept “just wrong.”

Praet’s remark garnered a response from prominent MMT enthusiast Stephanie Kelton, a professor of public policy and economics at Stony Brook University in New York, who advised Bernie Sanders during his 2016 presidential campaign.

The ECB chief economist also answered 31 other questions, ranging from his central bank’s negative-interest-rate policy to what he plans to do after he leaves the decision-making body at the end of May.